Consumer Surplus

Posted in Marketing and Strategy Terms, Total Reads: 882

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Definition: Consumer Surplus

Consumer Surplus is the difference between the maximum price consumers are willing to pay for a product and the present price. Consumer Surplus is an economic term which is used to explain the monetary benefit or gain the consumers gain because of the prevailing prices. The total market value of the product which the consumer is paying for is rectangle shown in the graph (A) and the total utility of the product is the rectangle and the shaded region added together (B). The consumer surplus is the difference between the two regions (A and B) and is shown as the shaded region in the graph.

There are three cases in this. First case arises when the demand is inelastic. In that case the demand curve in vertical, hence the consumer surplus also because infinity. An example for inelastic demand would be that of essential products like milk, rice, onion etc. The other case is when the demand curve is horizontal i.e. demand is elastic. In this case there would be no consumer surplus. Examples of elastic demand is of soaps, toothpaste etc. In practical situations there would not be perfect inelastic and elastic demand. Hence, there would be some surplus in the elastic case and less than infinity in the inelastic case. The third case is a practical case where the demand curve is as shown above. The slope of the curve depends on the demand for a particular product.